West Africa Plans Common Currency

NEW HAVEN: France bowed to West African pressure in December, finally agreeing to loosen supervision of the Financial Community of Africa currency union and CFA franc. The new currency will be the eco, poised to launch this year, supervised under the auspices of the Economic Community of West African States, or ECOWAS.

But the lack of convergence in debt and inflation rates among the members renders the entire Eco project premature, risky and fatally flawed from its very conception. The reality is that the differences among ECOWAS economies are large, and the type of institutional arrangements that would allow disparate economic entities to share a common currency is lacking.

The eco could benefit by studying lessons from the euro, established two decades ago after six years of planning followed by three years of full currency integration before euro cash hit the streets.

Still, the eco project might have a fighting chance, given that eight ECOWAS members already have 75 years’ experience with a single currency under the CFA franc. The CFA franc is a common currency used by two African monetary zones – the Western zone comprising of eight countries and the Central Zone with six mostly petro-states. The currency was established after World War II to help France import goods from its colonies – initially pegged to the French franc, and later the euro – and many regard the currency as a relic of French colonial hold over the region.  The former French colonies had to store 50 percent of their foreign currency reserves in France in return for guarantees by the larger economy. A French representative also had to be on the board of the currency’s union.

These conditions were not as onerous as some might suggest. Euro pegging and French guarantee of the currency provided economic and financial stability, especially during times of severe political stress such as the Arab Spring protests, the 2008 global debt crisis and two civil wars in Ivory Coast, 2002-2007 and 2010-2011. Further, although the French Treasury held the reserves at a lower interest rate than France’s own inflation rate – about 0.5% versus 1.5% prevailing market rate, this was a reasonable premium to pay for such guarantees. (read full article)